Friday, September 30, 2011

The tragedy of the commons, illustrated

Markets do works -- if they didn't, we wouldn't be living in an age of almost unimaginable prosperity, relative to what came before. But when people use a resource they do not own, things get more complicated. As in the case of Black Hat guy, unowned resources allow us to privatize the benefits of a destructive act while socializing the losses, spreading them out over many people. Ownership prevents this from happening by providing someone in control of a resource who has a natural incentive to maximize its value, which includes not letting it be ruined by overuse or misuse.

What if you have something no one can own, like the ocean, or the atmosphere? Well, then you need collective political action to create a pseudo-ownership, either through regulation or a Pigovian tax that creates a "price" for damaging the resource, correcting the market incentives to account for the unowned resource without otherwise distorting the market. In the case of climate change, what we need is a carbon tax.

This is not a leftist/Marxist/back-to-nature/anticapitalist idea. Even that beloved saint of blog-libertarian crackpots, Hayek, is on board:

“Nor can certain harmful effects of deforestation, or of some methods of
farming, or of the smoke and noise of factories, be confined to the
owner of the property in question or to those who are willing to submit
to the damage for an agreed compensation. In such instances we must
find some substitute for the regulation by the price mechanism. But the
fact that we have to resort to the substitution of direct regulation by
authority where the conditions for the proper working of competition
cannot be created, does not prove that we should suppress competition
where it can be made to function.” (Hayek, 1944)